What We Are Working On For Strong Cash Flow as Multifamily Takes a Breather

by | Dec 15, 2023 | GAE Hotel Fund Blogs & Articles, Real Estate Syndications

Unless you are coming out of a Rip Van Winkle type sleep, you know that interest rates have exploded over the past 18 months, having been raised faster than they have in the past 40 years. The spike in the interest rates and significantly higher operational costs have dramatically impacted multifamily, especially those bought with floating debt (most properties in 2021 and 2022).

Due to much higher interest expenses and operating costs, many multifamily properties have been forced to halt distributions to pay these higher expenses and conserve cash to be able to fund interest rate hedges and/or future refinancings. This is happening in many cases despite the fact that operating performance is strong in terms of occupancy, continued but softening rent growth, and low delinquency.

Even the small percentage that are paying distributions have lower cash flow, typically 5% or less. And this high cost environment is also constraining cash flow on new multifamily investment opportunities, which are now mostly financed with fixed interest rates but that are substantially higher than rates were 18 months ago.

With current distributions temporarily down and the lack of abundant new multifamily opportunities with strong cashflow, what’s a passive investor to do if you were depending on a continual stream of strong cash flowing investments in your portfolio?

Multifamily Alternatives

Though the operational core of GrowAbility Equity is multifamily, there are a number of cash flowing assets we have researched and invested in passively over the past 5 years besides multifamily, from self-storage to mobile home communities (MHCs) to hotels to ATMs to oil and gas. Our passive investing goal is to not only build wealth for our own families, but to also find opportunities with strong operators that we can curate to offer the best to our investment community.

Now, of our passive investments, self-storage, MHCs and hotels are most like multifamily. Why? Because these syndications all possess the dimensions that make multifamily a high profit vehicle:

  • Consistent predictable cash flow of 5% or more
  • A doubling of your investment typically in 5-7 years
  • Tax savings from depreciation

In our continual search for and review of many investment opportunities, we have really been drawn to the strong performance and prospects for a certain niche in the hotel segment. Here’s a primer…check it out to see the great things happening there.

Why We Like This Hotel Segment Niche

We absolutely love the Select Service hotel segment. These are not full service hotels like a high-rise Hilton or Marriott with expansive amenities (spa, pool, fitness room, restaurants and bars, bellmen, room service). They are also not limited service hotels like a Hampton Inn or Extended Stay America that are very cost-effective with many do-it-yourself features like in-suite kitchens, self-serve laundry, grab and go breakfast, but that may or may not have a pool or fitness room.

Select-service hotels are a hybrid between the two. They bring the cost-effectiveness of limited service hotels but add some of high-demand amenities from full-service establishments. They will have a restaurant but with a more restricted menu and more restricted hours. They will have a smaller pool, and a smaller fitness room than full-service. On the other hand, they will have in-room amenities that may even surpass full-service hotels to give residents, for example, the ability to self-prepare meals. Popular brands here are Courtyard by Marriott, Hyatt Place and Hilton Garden Inn.

Because these rooms are very attractive to both business and personal travelers, select-service is one of the fastest growing hotel segments. This segment has seen increasing demand since 2007 when corporate budgets tightened (going into the 2008/9 Great Recession). This was caused by their competitive edge in providing quality accommodations in addition to key common and in-room amenities, at a lower price than full-service hotels. Penetration by this segment is still relatively low and growth is expected to continue for years to come.

This segment is also a big beneficiary of robust travel by consumers. People are traveling more, especially post Covid, and these select service hotels which are typically located near major destinations and interstates are big beneficiaries of this trend.

What’s To Come

We are very excited about the Select-Service Segment. I actually invested in this segment in 2022 and am receiving cash flow north of 9% on an annualized basis.. It’s a segment that CBRE reported is the most profitable versus other hotel segments (44.2% vs. 37.5% operating margins). This segment also outperforms from an occupancy, room growth, and return perspective. This performance has endured multiple economic cycles, highlighting the downside risk protection and durable income steam the sector offers. And regarding Covid, it made this hotel segment – as well as others – much more cost-efficient and operationally streamlined…and more profitable.

Intriguing? Here at GrowAbility Equity we look to help investors accelerate their wealth building through syndications (group investments in larger properties than we could invest alone) where you can passively invest in cash flowing, high return investments that also typically offer tax savings. If you are interested in ways to make your money grow in real estate without swinging a hammer or taking 2am calls from residents, join our GrowAbility Equity Club. In our effort to research how to grow wealth in commercial real estate in the most consistent low risk way, we have identified self-service hotels as a great opportunity and will be offering a hotel fund for investors to participate. If you are an accredited investor, be on the lookout for investment details to come.

And if you have any questions about hotels or multifamily or anything else regarding your wealth building efforts, schedule a wealth acceleration call with us.

Thanks for being a part of our community. Until next time, keep growing your ability to accelerate your wealth and legacy building—we’re thrilled to be a part of this journey!